Judge Jacqueline Silbermann's ruling clears the way for a vote on Thursday, although it could be appealed.
The two council members' petition noted that the council would be voting on the extension of term limits for its own members, as well as for Bloomberg, who is pressing for the change.
Randy Mastro, lawyer for the two council members, said his clients oppose the proposed term-limits vote "as a matter of deeply held principle."
The petition named the city's Conflicts of Interest Board and the council as defendants.
The board, which consists of mayoral appointees, wrote an opinion last week concluding that it was not a conflict for council members to vote on term limits changes for themselves and the mayor.
The judge rejected the argument that the petitioners would be "irreparably harmed" by having to take part in a vote on extending term limits, saying they can vote no or abstain.
She also disagreed with the argument that council members might face civil and criminal penalties. She said members "have the protection of an advisory opinion" from the Conflicts of Interest Board.
In addition, the judge said it was improper for courts to interfere in the functions of a co-equal branch of government, in this case the legislative branch.
Mastro said he would consult with his clients before deciding whether to appeal.
City lawyer Stephen Kitzinger said he was "gratified" by the decision.
Two-thirds of the council members will be forced out of office next year under the existing law, which restricts the mayor, council members and other city officeholders to two consecutive four-year terms. The mayor's proposal would add the option for a third term.
On Wednesday, three council members who say they are undecided on Bloomberg's bill announced they would introduce a measure Thursday that seeks to have the term-limits issue decided by voter referendum. Voters twice approved term limits in the 1990s, and the majority of opponents to Bloomberg's plan say the matter should be decided by the public, not the council.
The referendum proposal would establish a commission with the intention of holding a special election by next spring. Bloomberg, whose supporters put the proposal on a fast track for a vote before the council, has said there is not enough time for a voter referendum, given that the next mayor's race is next year.
He also contends turnout would be too low in a special election, creating the potential for legal problems.
Bloomberg announced his intentions three weeks ago amid increasing turmoil on Wall Street, arguing that he is uniquely qualified to lead the city through the long-term effects of the financial crisis because of his business background. The founder of the multibillion-dollar financial data firm Bloomberg LP, the mayor is reported to be worth an estimated $20 billion.
The petitioners' court papers noted that Bloomberg had previously expressed his support for term limits.
"Then, when the recent crisis in New York and worldwide financial markets unfolded, Mayor Bloomberg seized on the opportunity to make public his private desire to amend the term-limits laws" so he and some council members could stay in office, court papers said.
Also Wednesday, four voters in Brooklyn filed a petition asking the court to void the term limits proposal if it becomes law or limit it to a mayor and council elected in 2009 if it's eventually enacted.
More lawsuits are expected if the City Council passes Bloomberg's proposal. Opponents have said they are planning legal action, and politically connected billionaire B. Thomas Golisano said he might help finance such an effort.
